China Tourism Group Duty Free (SHSE:601888) Is Posting Promising Earnings But The Good News Doesn’t Stop There

China Tourism Group Duty Free Corporation Limited (SHSE:601888) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.

View our latest analysis for China Tourism Group Duty Free

Zooming In On China Tourism Group Duty Free's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2023, China Tourism Group Duty Free had an accrual ratio of -0.22. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥13b in the last year, which was a lot more than its statutory profit of CN¥6.71b. Given that China Tourism Group Duty Free had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥13b would seem to be a step in the right direction.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On China Tourism Group Duty Free's Profit Performance

Happily for shareholders, China Tourism Group Duty Free produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think China Tourism Group Duty Free's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 28% over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing China Tourism Group Duty Free at this point in time. Every company has risks, and we've spotted 1 warning sign for China Tourism Group Duty Free you should know about.

This note has only looked at a single factor that sheds light on the nature of China Tourism Group Duty Free's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.